The Supreme Court ruled that leasing residential properties for student and professional hostels is exempt from GST, confirming the Karnataka High Court’s earlier decision. This judgment clarifies that the GST exemption applies to renting for residential use, not tenant type.
New Delhi: The Supreme Court has ruled that leasing residential properties for student and professional hostels is not subject to Goods and Services Tax (GST), as long as the properties are used for residential purposes.
This ruling upheld the Karnataka High Court’s decision, which set-aside previous ruling by the Appellate Authority for Advance Ruling in Karnataka.
The judgment clarifies the situation for homeowners, lessors, students, working professionals, and operators of long-term hostel accommodations by confirming that the GST exemption under Entry 13 of the 2017 exemption notification pertains to renting for residential purposes, rather than the type of tenant.
Also Read: No GST on Hostels for Students: Supreme Court Says ‘Ultimate Use Is Residential’
The Supreme Court also dismissed an appeal from the State of Karnataka, which contested the High Court’s 2022 ruling favoring property owners.
Background of the case
The case arose from a disagreement regarding the applicability of GST on rental income from a leased residential building functioning as a hostel. The primary respondent, Taghar Vasudeva Ambarish, was a co-owner of a residential property in Bengaluru featuring 42 rooms spread over four floors, along with shared areas and terrace space. Official municipal records classified the property as residential.
In 2019, the co-owners leased the property to M/s DTwelve Spaces Private Limited, which managed it as a hostel, providing long-term accommodations for students and working professionals, with stays ranging from three to twelve months. To clarify the GST obligations, the respondent approached the Authority for Advance Ruling under Section 97 of the Integrated Goods and Services Tax Act, 2017. The Authority concluded that leasing the premises as a hostel was not exempt under Entry 13 of the applicable GST notification. This conclusion was upheld by the Appellate Authority for Advance Ruling in 2020.
In 2022, the Karnataka High Court overturned these rulings, determining that leasing residential premises for hostel use was indeed eligible for GST exemption. The State of Karnataka subsequently appealed this decision to the Supreme Court.
The Legal Question Involved,
Whether GST at the rate of 18 percent applicable on rental income received by the property owner when a residential building is leased to an operator who then offers long-term hostel accommodations?
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The Court examined Entry 13 of the 2017 exemption notification, which provides relief for renting services of residential dwellings designated for residential use.
The central issue was whether this exemption is applicable solely when the tenant personally occupies the premises as their residence or if it also applies in situations where the property is leased and subsequently sub-leased for residential purpose
The Court ruled that any accommodation intended for long-term stays qualifies as a residential dwelling. In this case, the Supreme Court readily concluded that the property in question was indeed a residential dwelling. It recognized that M/s DTwelve Spaces Private Limited acted as an aggregator, enabling the use of residential premises for hostel accommodations. In this arrangement, the lessee was considered the tenant, while the students and working professionals residing there were effectively sub-lessees.
Legally, a lease between the property owner and the tenant transitions to a sub-lease when the tenant allows another party to occupy the premises.
The Court determined that the requirement for residential use was fulfilled, as the ultimate purpose of the property remained residential, regardless of the intermediary structure involved.
The Supreme Court emphasized that the exemption outlined in Entry 13 pertains to the nature of the activity rather than the identity of the person involved. It clarified that GST law includes both person specific and activity specific exemptions, with Entry 13 falling into the latter category, where the eligibility for exemption is determined by the nature of the activity. Interpreting Entry 13 too narrowly such that it only applies when the tenant occupies the property personally would contradict the legislative intent. This interpretation could unjustly deny exemptions in cases where a property is sub-leased for residential purposes, despite the end use remaining unchanged.
The Court noted that applying GST in these circumstances would ultimately place a burden on students and working professionals, undermining the aim of exempting residential rentals from indirect taxation.
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The Supreme Court also analyzed subsequent amendments to Entry 13. It observed that, starting July 18, 2022, the exemption was limited in cases where residential properties were rented to registered individuals.
The Court ruled that the State could not apply this amendment retrospectively to deny exemptions for previous periods.
Additionally, an explanation added on January 1, 2023, clarified that even if the rent is paid by a registered individual, the exemption would still be applicable if the premises are used for personal residence. The Court noted that this further emphasized the original intention to exempt residential rentals from GST.
Judgment
The Supreme Court dismissed the State’s appeal, affirming the Karnataka High Court’s decision and confirming that leasing residential properties for use as hostels by students and working professionals is exempt from GST for the relevant period, provided the use remains residential.
This ruling provides clarity for property owners and tenants throughout India, ensuring that long-term hostel accommodations are not subject to additional tax burdens when the primary use is residential.
Case Title: State of Karnataka & anr Vs Taghar Vasudeva Ambarish & anr 2098726
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